Equilar Blog

With Voluntary Disclosure, Companies Get Ahead of CEO Pay Ratio

April 11, 2016

In August 2015, the SEC passed the
Pay Ratio Disclosure rule as
a part of Dodd-Frank, which will require them to include a comparison of CEO pay to that of a median employee.
Companies are not required to report this information in their proxy statements for two more years, and very
few have included this information in any way, shape or form. Moreover, most governance stakeholders do not
expect many voluntary disclosures before the rule is mandatory in 2018 proxy statements.

In the meantime, any presentation ahead of the mandate will provide insight into how the CEO pay ratio reflects
internal pay equity. As an example,
Adam’s Resources and Energy Inc. (AE) disclosed this information according to the SEC’s
rule, proactively telling its executive compensation story through this transparency.

Industry-specific complexities and international policies make defining pay for a median employee challenging.
As a result, the SEC regulation allows for companies to decide their own methodology for choosing their median
worker provided that they disclose this process. Adam’s Resources and Energy Inc. disclosed this methodology in
addition to acknowledging their preemptive inclusion and recognition of the rule as a measure of equitability
within the company. The entire disclosure from the April 6 proxy filing is below.

Pay Ratio Disclosure Rule

In August 2015 pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd – Frank Act”), the Securities and Exchange Commission adopted a rule requiring annual disclosure
of the ratio of the median employee’s annual total compensation to the total annual compensation of the
principal executive officer (‟PEO”). The Company’s PEO is Mr. Smith. Registrants must comply with the pay
ratio rule for the first fiscal year beginning on or after January 1, 2017. The purpose of the new required
disclosure is to provide a measure of the equitability of pay within the organization. The Company believes
its compensation philosophy and process yield an equitable result and is presenting such information in
advance of the required disclosure date as follows:

In determining the median employee, a listing was prepared of all employees as of December 31, 2015.
Employees on leave of absence were excluded from the list and wages and salaries were annualized for those
employees that were not employed for the full year of 2015. The median amount was selected from the
annualized list. For simplicity, the value of the Company’s 401(k) plan and medical benefits provided was
excluded as all employees including the PEO are offered the exact same benefits and the Company utilizes
the Internal Revenue Service safe harbor provision for 401(k) discrimination testing. As of December 31,
2015 the Company employed 809 persons of which 557 are professional truck drivers.

The company’s CEO pay ratio of 6.7:1 is a stark contrast to the statistic at a market level. The ratio of
median CEO pay in the S&P 500 to the median U.S. worker hit a peak of nearly 250:1 in 2014, according to
Equilar data on executive compensation compared against U.S. Department of Labor Statistics data on the
median U.S. worker.

These broader figures don’t tell the whole story, since they include the very highest paid and most successful
companies in the United States, and the median worker pay figure represents all workers regardless of company
size and revenue. Disclosures like the one highlighted here will go much further to tell the real story of
how executive pay compares to worker pay, and whether there are concerns about pay inequality from company
to company.

“The new CEO pay ratio is unlikely to materially change Say on Pay voting patterns, but it may influence some
investors who consider internal pay equity to be an important factor, or in cases where the ratio is dramatically
different than a company’s peers,” said John Beckman, a partner at
Hogan Lovells, whose firm
contributed independent commentary for Equilar’s annual Governance Outlook research report and the latest issue
of C-Suite magazine.

Using the pay ratio to determine “equitable pay” supports an emerging idea that executive compensation should
be determined by looking inwards at their employees’ pay rather than
comparing pay at peer companies.
For example, Israel recently adopted legislation restricting bank and insurance companies’ executive pay at
44 times their lowest workers’ pay. Even though this type of legislation looks distant
from the U.S., it will be interesting to how companies present this ratio, define their median employee, and
to see any if any other
pay ratio disclosure rules
arise. And of course, the question remains whether this will influence CEO pay levels at all.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of
Content & Marketing Communications at dmarcec@equilar.com.
Ryan Villard, research analyst, contributed to this post.